The banking career is etched in the collective imagination of the United States for a good reason. When the Great Depression hit, the savings of millions of Americans were wiped out when their banks collapsed. That’s why Federal Deposit Insurance Corp. (FDIC) was introduced in 1933. Since then, not a penny of FDIC-insured funds has been lost when banks fall.
It’s a different story when your “bank” is a cryptocurrency company. As cryptocurrency prices collapse, customer deposits are disappearing with them, or being dragged by the people behind the business. Unregulated markets look very similar now than they did in the 1920s.
Proponents of Bitcoin have largely abandoned the claim that cryptocurrency can function as a real currency, mainly because it is still largely unfeasible to pay for anything in it. Now the claim is that bitcoin is a “store of value,” that is, an asset that will not lose its value over time. This proved to be drastically false. More than that, the shopkeepers were putting valuables in their own vaults, denominated in US dollars.
In May, Terraform Labs’ terraUSD (UST) stablecoin, a symbol linked to the value of the US dollar but allowing faster transactions with little legal oversight, collapsed and crashed the price of bitcoin in turn. Things seemed stable for a few more weeks, but below the surface, the cryptocurrency market was in crisis.
On June 12, cryptocurrency investment firm Celsius halted all withdrawals, alleging “extreme market conditions.” The market panicked. The price of bitcoin has dropped from $ 28,000 to $ 20,000. On June 14, reports emerged that Celsius was “restructuring.” Within a week, bitcoin was down again.
Celsius said it could replace bank accounts and claimed a million customers. The company offered amazing interest rates, in the order of 18 percent annually. But Celsius’ interest rates were frankly unlikely. You can’t get more than a little performance anywhere in today’s economy. If someone offers 18 percent, the first thing you think should be, “What’s going on here?”
Celsius had already been expelled from Alabama, Texas, Kentucky, and New Jersey because his interest-bearing accounts were functionally unregistered securities offerings. The U.S. Securities and Exchange Commission has been investigating Celsius since January 2022, but has not yet acted against it.
The other problem was that Celsius was intertwined with many other cryptographic companies, including lending companies that offer equally unlikely interest rates. This was not a dishonest trader; was part of a systemic risk, comparable to that of Lehman Brothers during the 2008 financial crisis.
Behind all this was a landfill of toxic waste from unregulated investments of dubious origin. The price of Bitcoin started to rise in 2020 and was launched in a new asset bubble in early 2021, reaching a high of $ 64,000 in April 2021 and again at $ 69,000 in November 2021. Both price bombs coincided with the injection of several million bindings, a dubious equivalent in stable dollars. through unregulated offshore exchanges. Real interest and real dollars came from common investments when Elon Musk started talking about crypto in January 2021 and bought bitcoins for Tesla in February. When it was reported that Tesla sold bitcoins in May, many of those investments went out of business. (Later, Musk claimed to have sold only 10 percent of the shares). Without its real dollars, the price of bitcoin dropped to $ 31,000 in June 2021.
News headlines about cryptographic valuations in billions. But those numbers are faintly calculated virtual amounts, not real dollars you can use or take out. The cryptocurrency trade is zero-sum: every dollar that a winner wins, a loser loses. When that influx of real dollars slows down, cryptocurrencies have a problem.
There were not enough foreign dollars to pay for the paper wealth of the cryptocurrency holders. The industry has had to come up with more elaborate schemes to attract fresh foreign money. Venture capitalists frantically promoted NFT and Web3, although it was never clear what “Web3” meant. Crypto companies even posted ads during the Super Bowl in February, marking the point where an industry has reached almost every U.S. consumer and there are no new customers left.
This is good if your customers regularly need your product and you are making money with it, such as light bulbs or insurance or toilet paper. But it was a sign of the end for many money-losing companies that had reached the level of the Super Bowl, and it is even more lethal for investment schemes that rely on attracting new customers to pay for old ones, as Charles Ponzi discovered in 1920.
By 2021, cryptocurrency lending companies had risen to the bubble, offering unlikely interest rates. Celsius and the cryptographic fund Three Arrows Capital (3AC) held large positions with each other and in Terraform’s Anchor protocol. Celsius has repeatedly repaid loans – using borrowed assets as collateral for another loan – which has allowed for greater leverage to get even better returns in good times.
Cryptographic investment firms have played the hottest markets in crypto: the DeFi protocols. DeFi is the abbreviation for “decentralized finance”, a way to automatically exchange almost any cryptocurrency for any other. You can deposit assets and borrow against them. You can build complicated leverage chains. You can even re-mortgage your loans without being stopped by a human.
You can also create an asset out of thin air, do a couple of trades, and assign it a dollar price tag based on those transactions, even if the price of your token is actually in another token, with the price in a third token and that being dollar prices. This allows you to state a “market limitation” of millions or billions. Terraform’s UST token and its twin moon token were created and valued in this way. UST was promoted as a “stable currency” with a reliable value of $ 1 and supported by the moon. But UST and Luna were only backed by illusions and by Anchor, another investment vehicle that offered 20 percent interest on UST deposits. UST, Luna and Anchor collapsed in May. An alleged $ 18 billion in UST has fallen to zero. Bitcoin fell from $ 36,000 to $ 26,000.
Common mother and pop investors were badly burned by the May crash. The influx of retail dollars has been almost completely cut off. Cryptographic exchanges like Coinbase, Gemini, and Crypto.com are where foreign dollars come in and out of crypto; all three announced mass layoffs. When 60 minutes Australia conducted a segment on the cryptocurrency crisis, journalist Tom Steinfort confessed that he himself invested in the rise of the cryptocurrency with a council of friends.
UST / moon was the bear stearns moment of crypto. The big lenders assured customers that everything was fine and that they had not been exposed to UST or the moon, even though they had done so, but that the withdrawal used to be difficult. Observers noted that creditors’ DeFi exchanges, visible on the public blockchain, detailed how the numbers claimed by companies often did not match the evidence.
Finally, Celsius cut customer withdrawals on Monday, June 13th. 3AC began dumping on Tuesday and announced on Wednesday that it was “in the process of communicating with relevant parties.” Finblox, which offered up to 90 percent annual interest, reduced withdrawals to $ 1,500 a month on Thursday. Babel Finance froze withdrawals on Friday, citing “unusual liquidity pressures”.
The price of bitcoin had dropped to $ 20,000 on June 13 and stayed slightly above that price all week. This level was not merely psychological; There were several DeFi loans that would be automatically called out and settled if the price was below that number. This meant that the holders of those loans had to keep the pumped price a little higher. Other cryptocurrencies, such as ether, had equally critical price levels.
Funds to pump prices have finally run out. At 6:51 a.m. UTC on June 18, bitcoin dropped from $ 20,300 to $ 19,100 in five minutes, as several loans were self-liquidated simultaneously. That day it hit rock bottom at $ 17,600. As in the 2008 financial crisis, the cryptocurrency economy had been destroyed by unrestricted financial engineering and deliberately hidden over-leverage and risks. But this time, there was no Federal Reserve to rescue the companies.
So who will save cryptography? Since 2017, tether has regularly rescued crypto markets. One study showed that tying injections propped up most of the 2017 bubble, including the times when tying was insolvent. But Tether Holdings has been fined by New York and the Commodity Futures Trading Commission (CFTC) in 2021 for repeated misrepresentations over its claimed reserve reserve and placed under a strict reporting regime. Tether Holdings has been splitting its reserve position, reducing its issuance by 15 billion bonds, and last week specifically denied being exposed to the recently failed firms, although the company has invested in Celsius.
Regulating the cryptocurrency trading market is difficult. U.S.-regulated cryptocurrency exchanges are just the cashier’s desk for the precious dollars. The vast majority of trading and price discovery occurs in totally unregulated offshore exchanges that are apparently avoided by American customers. These scholarships allow and perpetrate all the abuses of the market and the clientele that brought about the regulation of the scholarships in 1933.
Cryptocurrencies are famous for abusing customers, but they can escape, and offshore markets make it much easier. However, even Coinbase, a US exchange that operates under New York regulation, has run a largely counterfeit market in the litecoin cryptocurrency from 2015 to 2018. 99 percent of transactions in a few days were laundered by Coinbase employees, buying and selling himself. The exchange was fined $ 6.5 million by the CFTC.
Celsius, however, was a flagrant failure of existing regulation at the expense of common investors. The company operated in U.S. jurisdiction for three years, offering unlikely interest rates without good explanations of where the money came from and taking investments from retail customers. Celsius and similar companies that traded to U.S. investors should have been shut down a year ago at the latest.
Now that the party is over and the horse is stuck, the regulators can feel safe to enter and close the barn door. If they don’t, another bubble may occur in a few years. Regulators have been unable to control cryptography after the bursting of the 2017 bitcoin bubble. This time they should not miss their chance.